Good morning!
Today is all of about the Fed and all about 10 AM Eastern. Markets moved up overnight after closing at the lows yesterday. Most of the drop was most likely due to the bombings in Afghanistan that killed at least 13 service members and dozens of Afghan civilians. Our thoughts and prayers are with those families.
Yesterday, three non voting Fed governors came out and in perfect unison, all declared that the taper time has come. It would be hard to believe that it would be by accident. The questions around the Fed policy changes revolve around asset purchases and interest rates. In the past, the two have been tied together. The Fed may try to keep them unlinked to reduce market disruptions but I don’t think that will work. Once the announcement is made, bond rates will move higher, which will attract investors. Those investment dollars will shift from the stock market into bonds and guess what? The stock market typically goes down.
It seems that the Fed has been trying to prepare the market for what is to come. But I am puzzled that the market has clearly not priced this in. All of the talking heads have been saying that “it will be okay.” “The earnings have been great.” “The economy is strong.” They are all saying this because they are all in. But just like anytime before, FOMO and complacency has taken over and the market has continued to march higher and higher.
The market multiple, which is the backward Price to Earnings ratio, is at 22 and it is because bond rates are close to all time lows. As bond rates move up, market multiples will move down. That is just a what happens. The Fed knows this and has delayed the inevitable. This is the dilemma but it is important for the stock market to take its medicine and move on.
Talk soon,
Al Losada
Founder | SimpleOptionStrategies.com
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